## Introduction

### Equity stakes & Bonus

Bonus is defined as “an annual, short-term incentive that usually involves targets considered to be under the fairly immediate control of executives” (Bruce et al, 2007, p.281). “Having less transparency and more complicated bonus schemes, it leads to higher bonus for executives but such complexity of shareholder value is not been associated with” (ibid, p.282). Berkeley Group plc reveals the case where there is not information disclosed relating the bonus performance targets in the annual report and doubts were reflected questioning if it was related to transparency or camouflage issue (ibid, p.289). As a famous case for its bankruptcy in 2001, Enron received criticisms regarding the reasons of its collapse and the people that were involved (Ackman, 2002; Wearing, 2005; Eichenwald, 2002). Enron was accused for earnings manipulation having as benefit to executives a huge amount of share bonuses.

Thomas (2002, cited in Arnold and Lange, 2004, p.754) reported that “Jeffrey Skilling, Former Enron’s CEO, have received bonuses that had no ceiling, permitting the traders to ‘eat what they killed’”. By proceeding to illegal insider trading to manipulate earnings and to use “heavy stock option awards linked to short term stock price” (Healy and Palepu, 2003, p.13), they aimed to achieve rapid growth in Wall Street and to gain high levels of bonuses. Andrew Fastow, Former Enron’s CFO, prepared different financial statements and reports to communicate with management and other ones for Enron’s owners, employees and stakeholders. Thus, Enron failed to be transparent and to disclosure the actual financial information. Executives have hidden the company’s real financial condition by presenting fake results, cheating the interested parties including Enron’s owners (Wearing, 2005). Their role as theatre actors is seemed through an Interview of Skilling by PBS’s Frontline (2001) where he mentioned: “We are the good guys. We are on the side of angels” knowing that this statement does not stand.

### Weak Stock Options & Excessive Risk

Stock options have faced difficulties on the alignment of managerial incentives with shareholders goals. Kim et al (2010, pp.18-19) stated that “due to the combination of stock price appreciation and dividends on shareholder returns, CEO increases dividends in favour of using the cash aiming to increase the stock price”. By increasing stock price, CEO gains higher share of dividends at the end of the year. Thus, CEO tends to take risky projects and follow risky business strategy to have higher chances to get stock options award. In this case, CEO takes advantage of his/her position by acting and taking decisions without thinking the possible consequences. Executive risks can be regarded as additional cause of executive pay limitations. According to Firth et al (1999, p.618), “executives work very hard to meet the expectations and to maintain company’s share price”. “Because of shareholders’ pressure, companies generate high financial returns at levels that were not sustainable, with management’s compensation” (Lipton et al, 2009, p.2). In several cases of financial failures, it can be noticed how executives are able to use creative accounting to manipulate figures in financial statements. In the case of Lehman Brothers’ collapse, executives were accused of “using Repo 105 method for off balance sheet activities” to deceive investors and shareholders about company’s true financial condition (Guerrera and Sender, 2010). In the case of Enron, Ackman (2002) argued that executives used “dubious, even criminal, accounting tricks” to meet the performance requirements of board of directors ignoring significant profitability measures. Even before the total failure, executives continue to receive compensation rewards, known as “midnight bonuses” (BBC News, 2006).

### Lack of Connection between Performance & Compensation

In general, stock prices are affected by company performance and by external factors as world economy. When there is prosperity in the economy, the stock prices increase. All companies, regardless of their financial condition and success, take the advantage of it. Therefore, executives of poorly run companies are being enhanced by receiving richly compensation, without having worked sufficiently and fairly. On the other hand, when there are economic difficulties in the company due to stock price fall, executives should be awarded but they are not, due to decreased options. However, there is the case with Stanley O’Neal, Merrill Lynch CEO, which seems to act differently in a market fall. According to Kim et al (2010, p.20), “he was CEO of Merrill Lynch during the 2007 financial crisis who was seen playing golf while his company was facing financial problems and losing a significant amount of money”. It reported that O’Neal has received an extremely large pay package after his departure from the company that was measured according his performance in the company (Tse, 2007). He did not work sufficiently and fairly in order to get this remuneration, but he stepped down leaving his company in crisis where ‘pay for no performance’ existed. This is not the profile of CEO that a shareholder wants to see in charge (see Rogers, 2014; Boesler, 2012; DeCarlo, 2012).

Jensen and Murphy (1990a), Bebchuk and Fried (2004) and Jensen and Murphy (2004) criticized the performance-based pay arguing that the executive remuneration’ problem was not the high levels of compensations received by CEOs, but the fact that their compensation was not related to companies’ performance. According to BBC (2012), Kar-Gupta (2012) and Treanor (2011), Stephen Hester, RBS’ CEO and the remaining RBS’s top executives received similar criticisms regarding the huge amount of benefits. Mass media and newspapers (e.g. BBC, Reuters, The Telegraph etc.) have reflected the public’s global dissatisfaction towards bank executives’ compensations during recession. According to Kar-Gupta (2012, para. 11), Matthew Oakeshott, the Liberal Democrat lawmaker, argued that it is “totally unacceptable reward for failure” when Hester did not accomplish his role correctly in RBS by making inefficient decision making and pay for no performance is reflected. As executives choose only risky projects to invest company’s money satisfying their hubris, the results will be dramatic for the economy. Thus, some recommendations for immediate actions to be taken are provided by Liberal Democrat minister Jeremy Browne stating “should turn down the bonus” and Conservative Mayor of London Boris Johnson stating “the government should step in and sort it out” but Dr Ruth Bender from Cranfield School of Management had an opposite opinion that “the bonus was reasonable” (BBC, 2012). According to Sparkes (2012, para. 3), “Prime Minister David Cameron reported that new measures will be taken to allow shareholders to a company bosses’ reject a wage or bonus by giving to shareholders a binding ‘vote on top pay packages’ and on payment for failure.”

### Executive pay as executives’ greed

Viewing the ‘two sides of coin’, Junarsin (2011, p.164) stated that “if it is used appropriately without any excess or fraudulent actions, executive compensation can bond executives to owners so as to enhance shareholder wealth”. On the other hand, “the misused or dysfunction of this corporate governance mechanism can impoverish managerial entrenchment and moral hazard” (ibid, p.164). Levitt (2005, p.41) mentioned on Bebchuk and Fried (2004)’s findings that confirm the statement “a breakdown in corporate governance and a build-up in greed”. The huge amounts of executive pays drive the corporate governance to erosion sending the message that boards of directors spend shareholders’ money lavishly and without the appropriate supervision. As former senior partner of Goldman Sachs, Gus Levy used to say that everybody in the company are “greedy, but long-term greedy” (Endlich, 1999, p.18), confirming the above statement.

### Corporate Loans

In WorldCom case, CEO Bernard Ebbers obtained unsecured loans with interest payable lower than borrowing from external parties such as banks (Wearing, 2005, p.88). According to Wearing (2005, p.88), one possible reason for this action may be to resolve his personal financial problems, but this could negatively influence company’s share price. If the CEO’s investments might fail, the company will have significant losses. When WorldCom entered into bankruptcy, the share price decreased dramatically and thus, Ebbers was not able to settle the loan by selling his shares, as he had supposed to fulfil. Lublin and Young (2002, para. 14) present some criticisms that the practice of WorldCom to give loans to its CEO was a bad idea, referring to the statements of William Rollnick, director and compensation-committee member at Mattel Inc “such lending should not be part of the general pay scheme or perks for executives” and the toy maker in El Segundo, Calif, “it should not be done for large amounts”. Therefore, compensation committee did not follow the appropriate legislations to provide a secured loan to CEO, characterizing this decision as hurried movement without thinking the possible consequences. If the compensation committee had secured the loans, Ebber’s shares might have been seized for sale to cover the loan when the stock prices were still high enough to do so.

### Golden Goodbyes’ consequences

After their retirement, executives receive compensation, characterized as “Gratuitous Goodbye Payments” (Bebchuk and Fried, 2003, p.81). As in cases of FleetBoston and IBM, CEOs live a luxury life by receiving retirement packages with huge amount of money and free access to corporate jets, apartments and other benefits (Kim et al, 2010; Revell et al, 2003). The case of Fannie Mae was an example of a poor and conflicting executive pay management where several problems with compensation arrangements existed. According to Bebchuk and Fried (2005, p.1), CEO Franklin Raines and CFO Timothy Howard have resigned classifying their acts “as ‘retirements’ and obtaining their retirement packages where after it was discovered that company’s earnings were inflated over the previous years”. As earnings increase, the level of executive compensation is growing but in this case the two executives act fraudulently to secure their future bonuses. “This is unacceptable and must change immediately” and “it's inexcusable that anyone would think it’s OK to hand out these bonuses" (Chadbourn, 2011, para. 14) were some of the bonuses’ criticisms. According to Bebchuk and Fried (2005), there was no relationship between executive pay and company performance characterizing it as ‘camouflage’ where executives have hidden their overall retirement rewards and no sign of transparency existed.

“The strong desire to camouflage may result to inefficient compensation structures that affect negatively the managerial incentives and company’s performance” (Bebchuk and Fried, 2003, p.76). Thus, weaknesses of pay arrangements show the necessity of reforms in current compensation practices.

## Conclusion

A significant interest in executive compensation and corporate governance can be observed due to the prevailing financial climate, the financial collapses of well-known firms and the accusation of rewards for failure and a lack of accountability. Criticisms from different backgrounds reflect the problematic side of executive remuneration, as it cannot fully be handled to the related practices as a corporate governance mechanism. Using whatever form of executive compensation, executives are never happy and satisfied and they ask for more, showing their hubris (see Brennan and Conroy, 2013; Hiller and Hambrick, 2005). However, there are those arguments who try to defend and to argue that this kind of rewards are deserved for executives and if there is a proper management with the help of related legislation and corporate governance codes, both parties, principal and agent, could be winners of the case without eroding any principal-agent concept and the company’s financial condition. Unfortunately, this greed element exists where executives act without thinking the consequences and the parties that can be influenced. In the case of Enron, the victims were the employees that have lost their jobs, pensions and in one day, their dreams were collapsed. Therefore, calls for immediate legislations and reforms have been presented through these years in order to find out the possible solution that may stop this devastating situation with executive pay. In the beginning, executive pay seemed to be the solution where the scene suddenly changed and the consequences are followed one by one.